Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Saturday, August 16, 2008

SEC Obtains Asset Freeze Against Alleged International Fraud

The SEC obtained an emergency court order freezing the profits from an alleged $13 million international fraud involving a Seattle-area microcap company and a Barcelona stock promoter. The Commission charged GHL Technologies, Inc., and its CEO Gene Hew-Len with issuing a series of false press releases touting the company's business dealings. The Commission also charged Francisco Abellan (also known as "Frank Abel") of Barcelona, Spain with coordinating the scheme, sending glossy promotional mailers to over 2 million U.S. recipients and unloading over $13 million in GHL stock on unsuspecting investors.  At the SEC's request, the federal district court in Tacoma, Wash. Thursday issued an order freezing Abellan's assets and prohibiting him from further dissipating the proceeds of the scheme (most of which, according to the SEC, he transferred to multiple bank accounts in the principality of Andorra).

GHL (later renamed NXGen Holdings, Inc.) is an installer of GPS-based navigation equipment. According to the Commission's complaint, in early 2006, President and CEO Hew-Len and stock promoter Abellan arranged for GHL to issue millions of shares of GHL stock to offshore entities designated by Abellan. In April 2006, the SEC alleges, Abellan caused the dissemination of "The Street Stock Report," a full-color glossy mailer sent to millions of U.S. addresses urging investors to purchase GHL stock quickly to see huge trading profits. Around the same time, Hew-Len issued nine press releases over a nine-week period hyping the company. Among other things, according to the SEC, the press releases made false claims about contracts with large customers, fraudulently touting millions of dollars in potential revenues.  Following this concerted promotion campaign, GHL's stock price doubled and trading volume spiked nearly 1500%. Abellan and his entities sold their GHL stock holdings for profits in excess of $13 million. The stock, which reached a high of nearly $9 per share at the height of the scheme, now trades at under a penny.

The SEC's complaint charges GHL, Hew-Len and Abellan with numerous securities violations and seeks preliminary and permanent injunctions, disgorgement, penalties, and other permanent and emergency relief. Pursuant to the court's order, a hearing will be held on August 27, 2008 to determine whether the asset freeze will remain in place during the remainder of the litigation.

August 16, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wachovia Agrees to Buy Back over $8.5 Billion in ARSs

The SEC and the New York Attorney General announced on August 15 that investors, small businesses, and charities who purchased auction rate securities (ARS) through and Wachovia Capital Markets, LLC (collectively Wachovia) could receive over $8.5 billion to fully restore their losses and liquidity through a preliminary settlement that has been reached with Wachovia.

Under the terms of the agreement in principle, which are subject to finalization, review and approval by the Commission:

Wachovia agrees to repurchase ARS from all investors who purchased ARS from Wachovia prior to the collapse of the ARS market in mid-February 2008. In the wake of the market collapse, Wachovia investors are currently unable to liquidate approximately $8.8 billion in ARS holdings. Under the proposed settlement, Wachovia will offer to purchase roughly $5.7 billion of ARS held by individual investors, small businesses, and charitable organizations. The buy back will begin no later than Nov. 10, 2008 and conclude by Nov. 28, 2008. Wachovia also will offer to purchase the roughly $3.1 billion of ARS held by all other Wachovia investors in a buy back that will begin no later than June 10, 2009 and conclude by June 30, 2009.
 
Wachovia Securities, LLC will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
 
Until Wachovia actually provides for the liquidation of the ARS, Wachovia will provide customers no net loans that will remain outstanding until the ARS are repurchased.
 
To the extent customers have incurred consequential damages beyond the loss of liquidity in the customer's holdings of ARS, Wachovia will participate in a special arbitration process that the customer may elect and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby Wachovia will not contest liability for its misrepresentations or omissions concerning ARS.
 
Wachovia will provide notice to all customers of the settlement terms.

Wachovia will also pay New York State and the North American Securities Administrators Association (“NASAA”) civil penalties in the amount of $50 million, which will be distributed pro rata by states’ investment dollar totals. Wachovia faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether Wachovia has satisfactorily completed its obligations under the settlement, and the costs incurred by Wachovia in meeting those obligations, including other penalties incurred and the cost of remediation.

August 16, 2008 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, August 14, 2008

JP Morgan Chase and Morgan Stanley Agree to Buy Back ARSs in Settlement with New York AG

New York Attorney General Andrew M. Cuomo today announced another series of agreements to provide liquidity to consumers who purchased auction rate securities.  Under the agreements, JP Morgan Chase & Co. (“JP Morgan”) and Morgan Stanley will collectively return over $7 billion to investors across New York State and the nation. The agreements settle allegations that JP Morgan and Morgan Stanley made misrepresentations in their marketing and sales of auction rate securities, representing that they were safe, cash-equivalent products, when in fact they faced increasing liquidity risk.

JP Morgan and Morgan Stanley have agreed to buy back, no later than November 12, 2008, and December 11, 2008, respectively, all illiquid auction rate securities from all JP Morgan and Morgan Stanley retail customers, charities, and small to mid-sized businesses. Firms will also pay damages to investors who sold securities for a loss. JP Morgan and Morgan Stanley will also pay New York State and the North American Securities Administrators Association (“NASAA”) civil penalties in the amount of $25 million and $35 million, respectively, which will be distributed pro rata by states’ investment dollar totals. 

Today’s agreements with JP Morgan and Morgan Stanley come less than a week after Cuomo settled similar allegations against Citigroup and UBS.  The four settlements together provide relief to thousands of investors who were left holding $27 billion worth of securities they could not sell after the widespread failure of the auction rate securities market this past February. Citigroup, UBS, JP Morgan and Morgan Stanley are four of the larger participants in the auction rate securities market, and among them are responsible for more than half of all auction rate securities owned by investors. 

JP Morgan and Morgan Stanley will also:

• Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed;
• Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds;
• Undertake to expeditiously provide liquidity solutions to all other institutional investors;
• Reimburse all refinancing fees to any New York State municipal issuers who issued auction rate securities through JP Morgan and Morgan Stanley since August 1, 2007.

August 14, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Backdating Charges Against Former Apple GC

The SEC announced that it settled options backdating charges against Nancy R. Heinen, the former General Counsel of Apple, Inc. As part of the settlement Heinen agreed (without admitting or denying the allegations) to pay $2.2 million in disgorgement, interest and penalties, be barred from serving as an officer or director of any public company for five years, and be suspended from appearing or practicing as an attorney before the Commission for three years.

The SEC charged that Heinen caused Apple to fraudulently backdate two large options grants to senior executives of Apple — a February 2001 grant of 4.8 million options to Apple's Executive Team and a December 2001 grant of 7.5 million options to Apple Chief Executive Officer Steve Jobs — and altered company records to conceal the fraud. The complaint alleges that as a result of the backdating Apple underreported its expenses by nearly $40 million.

In the first instance, Apple granted 4.8 million options to six members of its Executive Team (including Heinen) in February 2001. Because the options were in-the-money when granted, Apple was required to report a compensation charge in its publicly-filed financial statements. The Commission alleges that, in order to avoid reporting this expense, Heinen caused Apple to backdate options to January 17, 2001, when Apple's share price was substantially lower. Heinen is also alleged to have directed her staff to prepare documents falsely indicating that Apple's Board had approved the Executive Team grant on January 17. As a result, Apple failed to record approximately $18.9 million in compensation expenses associated with the option grant.

The Commission's complaint also alleged improprieties in connection with a December 2001 grant of 7.5 million options to CEO Steve Jobs. Although the options were in-the-money at that time, Heinen — as with the Executive Team grant — caused Apple to backdate the grant to October 19, 2001, when Apple's share price was lower. As a result, the Commission alleges that Heinen caused Apple to improperly fail to record $20.3 million in compensation expense associated with the in-the-money options grant. The Commission further alleges that Heinen then signed fictitious Board minutes stating that Apple's Board had approved the grant to Jobs on October 19 at a "Special Meeting of the Board of Directors" — a meeting that, in fact, never occurred.

August 14, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 13, 2008

SEC's Division of Corporation Finance in 2008

John White, the Director of the Division of Corporation Finance, in a recent speech before the ABA's Section of Business Law, Committee on Federal Regulation of Securities, reported on the Division's activities to date in 2008 and what it expects to do in the remainder of the year.

August 13, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC and SROs Enter Insider Trading Surveillance Agreement

The SEC published for public comment an agreement among the securities self-regulatory organizations (SROs) that is designed to improve detection of insider trading across the equities markets by centralizing surveillance, investigation, and enforcement under NYSE Regulation, Inc. (NYSE Regulation) and the Financial Industry Regulatory Authority, Inc. (FINRA). Currently, each equity exchange is responsible for surveillance of trading on its market and any investigations and enforcement actions involving its members.  This proposed new approach by the SROs to detect and enforce prohibitions against insider trading arose from yearlong discussions among the SEC, NYSE Regulation, FINRA and the exchanges to improve market integrity and better protect investors and is intended to focus expertise and eliminate gaps and duplication in surveillance for insider trading among the equities markets.

To complement the regulatory allocation agreement published for comment today, the securities exchanges and FINRA also entered into regulatory services agreements. Together, these agreements would provide NYSE Regulation with responsibility for surveillance, investigation, and enforcement of insider trading in securities listed on the New York Stock Exchange and NYSE Arca; FINRA would have such responsibility with respect to NASDAQ-listed and Amex-listed securities, and securities listed solely on the Chicago Stock Exchange.

FINRA and the following equity exchanges are parties to these agreements:

American Stock Exchange LLC
Boston Stock Exchange, Inc.
CBOE Stock Exchange, LLC
Chicago Stock Exchange, Inc.
International Securities Exchange, LLC
NASDAQ Stock Market, LLC
National Stock Exchange, Inc.
New York Stock Exchange, LLC
NYSE Arca Inc.
Philadelphia Stock Exchange, Inc.
NYSE Regulation, Inc. (acting under authority delegated to it by NYSE)

The insider trading initiative for the equities markets follows a similar consolidation of responsibility for surveillance for insider trading involving securities options, which the SEC approved in June 2006.

Public comments should be received by the Commission no later than 21 days after publication of the proposed plan in the Federal Register.

August 13, 2008 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 12, 2008

Morgan Stanley Announces BuyBack Program for ARS

On August 11 Morgan Stanley announced that it will repurchase at par auction rate securities (ARS) that are held by its retail accounts and were purchased through the Firm prior to February 13, 2008:

Commencing no later than September 30, 2008, Morgan Stanley will offer to repurchase at par ARS held by all individuals, all charities and those small to medium sized businesses with accounts of $10 million or less (collectively, “retail clients”) that were purchased through the Firm prior to February 13, 2008, with the exception of those ARS where auctions are clearing or there is a scheduled redemption.  The Firm will keep this offer open until November 30, 2008.  The Firm anticipates that this buy-back program will result in repurchases from retail clients of approximately $4.5 billion.
Morgan Stanley will make whole any losses sustained by retail clients who purchased ARS through Morgan Stanley before Feb. 12, 2008, and sold such securities at a loss between that date and the date of this announcement.
Consistent with applicable regulatory rules, until Morgan Stanley actually provides for the liquidation of the securities on the schedule set forth above, on request, Morgan Stanley will provide no-cost loans to retail clients that will remain outstanding until the ARS are repurchased, and will reimburse retail clients for any interest costs incurred under any prior loan programs the Firm provided to its ARS customers.
To the extent that a retail client has incurred consequential damages beyond the loss of liquidity in the retail client's holdings of ARS, Morgan Stanley will participate in a special arbitration process that the retail client may elect, and that will be overseen by FINRA, whereby Morgan Stanley will not contest liability for any alleged misrepresentations and omissions concerning the ARS, but may challenge the existence or amount of any consequential damages; the arbitration claim will be heard by a single, non-industry arbitrator.
Morgan Stanley will use its best efforts to provide liquidity solutions for its institutional investor base, including continuing to work with issuers and other interested parties on capital markets solutions, financing options and market liquidity, with the goal of resolving institutional investor clients’ liquidity concerns no later than the end of 2009.  Institutional clients who purchased ARS after February 13, 2008, as well as institutional clients who hold ARS where the auctions are clearing will be excluded from the program.

August 12, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Relief in Universal Leases Litigation

The SEC announced that on August 6, 2008, the federal district Court for the Northern District of Illinois entered an order permanently enjoining Warren Todd Chambers (Chambers) and Century Estate Planning, Inc. (Century Estate Planning), Chambers' business, from violating the antifraud and registration provisions of the federal securities laws. The SEC's complaint in this matter charges that Michael E. Kelly and 25 other defendants, including Chambers and Century Estate Planning, participated in a massive fraud on U.S. investors that involved the offer and sale of securities in the form of Universal Lease investments. Universal Leases were structured as timeshares in several hotels in Cancun, Mexico, coupled with a pre-arranged rental agreement that promised investors a high, fixed rate of return. The SEC's complaint alleges that from 1999 until 2005, Kelly and others, including Chambers and Century Estate Planning, raised at least $428 million through the Universal Lease scheme from investors throughout the United States, with more than $136 million of the funds invested coming from IRA accounts. The SEC further alleges that a nationwide network of unregistered salespeople who sold the Universal Leases, including Chambers and Century Estate Planning, collected undisclosed commissions totaling more than $72 million. The SEC also alleges that Kelly and others ran the scheme from Cancun, Mexico, through a number of foreign entities in Mexico and Panama. According to the SEC's complaint, Kelly and others told investors that Universal Leases would generate guaranteed income through the leasing of investor timeshares by a large, independent leasing agent. In fact, the complaint alleges the leasing agent was a small Panamanian travel agency controlled by Kelly and for most of the scheme its payments to investors came from accounts funded by money raised from new investors. Further, the complaint alleges that Kelly and others, including Chambers and Century Estate Planning, failed to disclose key facts about the Universal Lease investments, including the risks of the investments and that more than $72 million in investor funds were used to pay commissions as high as 27% to the selling brokers. The SEC continues to pursue its claims against Chambers and Century Estate Planning for disgorgement and civil penalties. The SEC's action against the remaining defendants is also pending.

August 12, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Phoenix Attorney with Corporate Identity Theft

The SEC filed a civil complaint against David B. Stocker, a Phoenix, Arizona attorney, and his wholly-owned corporation, Carrera Capital, Inc. The Commission's complaint alleges that, beginning in early 2006, Stocker allegedly found several companies whose stock had once traded in the public markets, but that had become defunct corporations and were no longer operating. When he found such a company, he allegedly incorporated a new company under the same name in the same State and, using his authority to act for the new company, purported to act on behalf of the old company. Specifically, Stocker allegedly caused stock in the old companies to be exchanged for stock in the new companies under the false pretense that the old company was undergoing a reverse stock split. Stocker then allegedly caused the new companies to issue large blocks of stock to Carrera Capital, Inc., or to other persons, such that he or the other persons typically held 99% of the stock in the new companies. Through this scheme, Stocker was allegedly able to gain control of public shells without having to pay for them or otherwise deal with their former control persons. The Commission alleges that Stocker profited from the scheme by selling the shells for cash payments.

The SEC's complaint seeks permanent injunctions, orders to provide an accounting, disgorgement plus prejudgment interest, third tier civil penalties, and penny stock bars against each defendant.

August 12, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Suit Charging Ponzi Scheme

The SEC filed a civil injunctive action against Kay Services, LLC, and its sole owner and officer, Marcia Sladich, alleging that they orchestrated a Ponzi scheme raising more than $10 million from at least 1,000 victims, many of whom were members of the Family Federation for World Peace, formerly known as the Unification Church.  The complaint alleges that Sladich repeatedly told investors that their money would be invested in domestic and international real estate and promised investors 50–100% guaranteed return on their investment in one year. She also promised investors additional payments for every investor they referred.  Throughout the scheme, Kay Services had no revenue-generating business or assets. The complaint charges the defendants with violating federal securities laws, seeks an order permanently enjoining the defendants from committing future violations and a final judgment ordering the individual defendants to disgorge their ill-gotten gains and to pay civil penalties.

August 12, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, August 11, 2008

Doidge et alia on Deregistrations under Rule 12h-6

Why Do Foreign Firms Leave U.S. Equity Markets? An Analysis of Deregistrations Under SEC Exchange Act Rule 12h-6 , by Craig Doidge, University of Toronto - Joseph L. Rotman School of Management; George Andrew Karolyi, Ohio State University - Department of Finance; and René M. Stulz, Ohio State University - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

On March 21, 2007, the Securities and Exchange Commission (SEC) adopted Exchange Act Rule 12h-6 which makes it easier for foreign private issuers to deregister and terminate the reporting obligations associated with a listing on a major U.S. exchange. We examine the characteristics of 59 firms that immediately announced they would deregister under the new rules, their potential motivations for doing so, as well as the economic consequences of their decisions. We find that these firms experienced significantly slower growth and lower stock returns than other U.S. exchange-listed foreign firms in the years preceding the decision. There is weak evidence that firms experience negative stock returns when they announce deregistration and stronger evidence that the stock-price reaction is worse for firms with higher growth. When we examine stock-price reactions around events associated with the passage of the Sarbanes-Oxley Act (SOX), we find negative average stock-price reactions with some specifications but not others. Further, there is no evidence that deregistering firms were affected more negatively by SOX than foreign-listed firms that did not deregister. Our evidence supports the hypothesis that foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and that, when those opportunities disappear, a listing becomes less valuable to corporate insiders so that firms are more likely to deregister and go home.

August 11, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

SEC Files Charges Alleging Ponzi Scheme

The SEC filed charges against Wextrust Capital, LLC (Wextrust), its principals, and four affiliated Wextrust entities, alleging that defendants conducted a massive Ponzi-type scheme from 2005 or earlier that raised approximately $255 million from approximately 1,200 investors. The targets of the fraudulent offerings are primarily members of the Orthodox Jewish community. Simultaneously with the filing of the action, the Commission is seeking emergency relief from the Court to freeze the defendants' assets and place the Wextrust entities under the control of a receiver to safeguard assets. The Commission is also seeking a temporary restraining order to stop the ongoing offerings and other immediate relief.

The Commission's complaint, filed in federal court in Manhattan, charges that Wextrust, its principals Steven Byers and Joseph Shereshevsky, and its affiliated entities Wextrust Equity Partners, LLC (WEP), Wextrust Development Group, LLC (WDG), Wextrust Securities, LLC (Wextrust Securities) and Axela Hospitality, LLC (Axela) conducted at least 60 securities offerings through private placements and created approximately 150 entities in the form of limited liability companies or similar vehicles to act as issuers or facilitators of the offerings, purportedly to fund the acquisition of specified assets, the majority of which were commercial real estate ventures. Contrary to representations in the offering memoranda that proceeds would be used for specific projects, the defendants allegedly diverted funds to pay returns to investors in prior offerings, or to fund expenses of the defendants.

Overall, the complaint alleges, defendants diverted at least $100 million dollars to unauthorized purposes. The complaint alleges that the defendants are conducting at least four ongoing offering frauds intended to raise money to pay back investors from prior offerings.  In addition to the emergency relief sought today, the Commission's complaint seeks disgorgement of the defendants' ill-gotten gains, civil penalties, and permanent injunctions barring future violations of the antifraud and other provisions of the federal securities laws.

August 11, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

New York Expands ARS Investigation

New York Attorney General Andrew M. Cuomo today announced his office is expanding its investigation into the auction rate securities scandal. Cuomo today sent letters to JP Morgan Chase, Morgan Stanley and Wachovia announcing that his office will look into the firms’ behavior pertaining to misrepresenting auction rate securities to investors as safe, cash-equivalent products, when in fact they faced increasing liquidity risk.

Last week the SEC, the New York Attorney General and NASAA entered into agreements with UBS and Citigroup that will return over $20 billion to investors.   

August 11, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Stock Manipulation Through Theft of Online Accounts

The SEC filed a complaint on August 8 in the United States District Court for the District of Connecticut charging Dmitriy Butko, a Russian resident, with fraudulently manipulating the prices of numerous stocks by using the Internet to intrude into the online brokerage accounts of unsuspecting customers at U.S. broker-dealers.  The complaint alleges that between October 19, 2006 through November 30, 2006, Butko, or others acting in concert, commandeered the online trading accounts of unwitting investors at various broker-dealers, liquidated existing equity positions and, using the resulting proceeds, purchased thinly traded stocks in order to create the appearance of trading activity and pump up the price of the stocks. The complaint further alleges that in five instances, Butko, in his own account, bought shares in the thinly traded issuers just prior to or at the same time that compromised accounts were made to buy shares, creating the false appearance of market activity. Shortly after the intrusions, Butko sold all of his shares at the inflated prices. In all but one of these instances, Butko realized a profit from his trading, netting a total profit of $60,362.

August 11, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

UBS Settles Charges and Agrees to Buy Back ARSs

On August 8 the SEC's Division of Enforcement announced a preliminary settlement in principle with UBS Securities LLC and UBS Financial Services, Inc. (collectively, UBS) including proposed charges and a plan that would restore approximately $22 billion in liquidity to its customers who invested in auction rate securities (ARS). This plan includes approximately $8.2 billion for individual investors, small businesses, and charitable organizations, $3.3 billion for holders of tax-exempt Auction Preferred Shares (subject to regulatory review), and $10.3 billion for institutional investors.

The terms of the agreement in principle, which are subject to finalization, review and approval by the SEC, provide:

UBS will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
 
No later than Oct. 31, 2008, UBS will offer to liquidate at par all ARS from individual investors and charitable organizations who have less than $1,000,000 in funds on deposit at UBS.
 
No later than Oct. 31, 2008, subject to regulatory approval, UBS will proceed with its plan for the repurchase of tax-exempt Auction Preferred Shares held by all UBS investors.
 
No later than Jan. 2, 2009, UBS will offer to liquidate at par all ARS from all other UBS individual investors and charitable organizations as well as from small business investors with account and household values up to $10,000,000.
 
UBS will use its best efforts to offer to liquidate at par ARS from its institutional customers by the end of 2009. However, by no later than June 30, 2010, UBS will offer to liquidate at par all ARS held by institutional customers.
 
UBS will make whole by Sept. 15, 2008, any losses sustained by the customers described above who sold ARS after Feb. 13, 2008.
 
Until UBS actually provides for the liquidation of the securities on the schedule set forth above, UBS will provide customers no-cost loans that will remain outstanding until the ARS are repurchased.
 
To the extent that the customers described above have incurred consequential damages beyond the loss of liquidity in the customer’s holdings of ARS (which should be restored pursuant to the settlement terms above), UBS will participate in a special arbitration process that the customer may elect, and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby UBS will not contest liability for its misrepresentations and omissions concerning the ARS, but may challenge the existence or amount of any consequential damages. The arbitration claim will be heard by a single, non-industry arbitrator.
 
This arbitration process will be voluntary on the part of the customer and if a customer elects not to take advantage of these special procedures, a customer may pursue all other arbitration or legal or equitable remedies available through any other administrative or judicial process available to the customer.
 
UBS will not liquidate its own inventory of a particular ARS before it liquidates its customers’ holding in that security.
 
UBS will provide notice to all customers of the settlement terms.
 
UBS will establish a telephone assistance line, with appropriate staffing, to respond to questions from customers concerning the terms of the settlement.
 
UBS faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether UBS has satisfactorily completed its obligations under the settlement, and the costs incurred by UBS in meeting those obligations, including penalties incurred and the cost of remediation.

In addition, the New York State Attorney General announced that as part of the settlement of charges brought by it, UBS will pay to the State of New York a civil penalty in the amount of $75 million. UBS will also pay a separate civil penalty of $75 million to the North American Securities Administrators Association (“NASAA”), whose ARS Task Force has been conducting its own series of investigations into the marketing and sale of auction rate securities by broker-dealer firms.

August 11, 2008 in Other Regulatory Action, SEC Action | Permalink | Comments (1) | TrackBack (0)